How to Refinance Your Car Loan, and When It's Beneficial

TL;DR

Refinancing your car loan means replacing your existing auto loan with a new one that ideally has a lower interest rate or better terms. This process can reduce your monthly car loan payments, lower the total interest costs (saving you money in the long run), and even help you pay off the loan sooner. It's beneficial to consider if your credit score has improved or if market interest rates have dropped since you got your original loan. Just be mindful of any fees or prepayment penalties on your current loan before refinancing.

Key Takeaways

• Refinancing can save money: By qualifying for a lower interest rate or a shorter term on a new loan, you can reduce interest costs and potentially pay off your car loan faster, saving money over time.
  
  
• Lower monthly payments: If you’re struggling with a tight monthly budget, refinancing can lower your monthly car loan payments. This might involve securing a better interest rate or extending the term, though a longer term means paying more interest overall.
  
  
• Eligibility and terms matter: You typically need a steady income, a decent credit score, and a vehicle with enough value to qualify for auto loan refinancing. Always review your current loan details (such as remaining balance and any prepayment penalty) and compare loan offers from banks, credit unions, and online lenders to ensure the new loan offers better terms without hidden costs.
  
  

Many car owners don't realize they might not have to stick with their original auto loan until the end of the term. Whether you had excellent credit or poor credit when you purchased your vehicle, auto loan refinancing could potentially secure you a lower interest rate, reduce your monthly payments, or even shorten your loan term. What seems like a small drop in the interest rate can actually save you hundreds (or thousands) of dollars in interest costs over the life of the loan.

For car buyers with non-prime (subprime) loans, refinancing can be especially helpful. If you initially took on a high-interest loan due to a low credit score or limited credit history, you might be dealing with higher monthly car loan payments that strain your monthly budget. Refinancing your existing car loan with a new loan at a better rate can give you some breathing room and save money by lowering those payments or reducing how much interest you pay.

But what does it actually mean to refinance your vehicle, and how do you know if it's the right move? In this article, we’ll break down how car refinancing works, how to refinance your car step by step, and when it’s beneficial to do so. Whether your goal is to lower your payments or pay off your car debt sooner, understanding auto refinancing will help you decide if it's the right choice for you.

How Car Loan Refinancing Works

Refinancing a car loan means replacing your current auto loan with a new one – ideally with better terms. Think of it as restarting your car financing, but without any price negotiation on the vehicle because you already own it. The new loan amount will be based on the remaining balance of your existing loan, which the new lender uses to pay off your original loan in full.

When you refinance, the new lender (or even your current lender, if you choose to stay with them) will evaluate your credit profile and often the vehicle's condition and value to make sure it qualifies. Once you're approved and you accept the offer, you'll sign a new loan agreement. The new lender then pays off the old loan, and going forward you’ll make payments to the new lender under the new interest rate and term.

Nothing changes with your car itself – you keep driving the same vehicle – but you now have a refinance loan with, hopefully, a lower rate or more favorable terms. This can mean paying less interest over time, enjoying lower payments, or even paying off the loan faster if you opt for a shorter term.

How to Refinance Your Car

Refinancing your car loan involves a few key steps. Here’s how to navigate the process:

1. Review your current loan details: Start by finding out your current interest rate, your remaining loan balance, and how many months you have left on the loan. Check if your loan contract has a prepayment penalty for paying the loan off early. Knowing these details will help you determine if refinancing will benefit you and what terms to look for in a new loan.
   
   
2. Check your credit score and report: Your credit health is a major factor in refinancing. Obtain your latest credit report and credit score to see where you stand. If your credit has improved since you took out the original loan, you’ll likely qualify for a better interest rate now. (Conversely, if your score is still low, you might hold off and rebuild credit first for a more favorable refinance.)
   
   
3. Shop around for the best interest rates: Research and compare offers from different banks, credit unions, and online lenders. Pay attention to current market interest rates for auto loans to know what’s competitive. Many lenders offer pre-qualification with a soft credit check, which won’t affect your score. Compare the loan offers you receive – look at the interest rates, term length, projected monthly payment, and any fees. Choose a refinance offer that saves you money (either through lower interest or lower payments) and fits your needs.
   
   
4. Prepare your documents and apply: Once you’ve identified a promising offer, submit a refinance loan application. You’ll need to provide personal and financial information. Common documents required include proof of income (like recent pay stubs or bank statements), proof of address (utility bill or a document with your current address), your vehicle registration and title, and possibly your insurance information. The lender will also do a hard credit check during this stage. Submit all required documents promptly to speed up the loan approval process.
   
   
5. Review the approval and terms: If approved, the lender will present you with the terms of the new loan (interest rate, monthly payment, term length, and any applicable fees). Review the offer carefully. Ensure the interest rate is lower than your current loan’s rate or that the new payment will indeed be lower. Take note of any charges — for example, some lenders charge an origination fee or might roll fees into the loan balance. Make sure you’re comfortable with the new loan conditions before accepting.
   
   
6. Finalize the refinance and pay off your old loan: If you decide to move forward, you’ll sign the new loan agreement. The new lender will then pay off your existing auto loan by sending the payoff amount to your current lender. This closes out your old loan. Going forward, you’ll make car payments to the new lender under the new interest rate and term. Be sure to update any automatic payment setups to the new lender so you don’t accidentally pay the old lender, and confirm that your original loan is fully paid off (you can check that the balance is zero).
   
   

Can I Refinance a Car Loan?

Just like when you first got your auto loan, you will need to meet certain requirements to refinance your car loan. In general, you can refinance a car loan if you meet the lender’s credit and income criteria. Most lenders will look for the following:

• Steady, verifiable income: You need a source of income that you can document (through pay stubs, tax returns, etc.) to show you can afford the new loan payments.
  
  
• Reasonable debt-to-income ratio: Lenders will check that your monthly debt obligations (loans, credit cards, etc.) aren't too high relative to your monthly income. This assures them you have enough breathing room in your budget to handle the car payment comfortably.
  
  
• Decent credit history: A higher credit score improves your chances of approval (and securing a lower rate), but you don't necessarily need perfect credit. Each lender has a minimum credit score requirement. If you now have a good credit score and you’ve made your current car loan payments on time, it will reflect positively on your credit report and boost your refinance prospects.
  
  
• Proof of residence and identity: You’ll need a stable address (and usually proof of it, like a utility bill) and a government-issued ID. Lenders need to verify who you are and where you live as part of the application.
  
  

In addition to these personal criteria, the vehicle itself should qualify for refinancing. Generally, the car should be in good condition and not too old or high in mileage (lender policies vary, but many won’t refinance very old or high-mileage vehicles). If your car is worth significantly less than what you owe (often called being "upside down" on the loan), refinancing might be difficult or not as beneficial unless you plan to cover the difference.

If you meet the requirements above, the answer is yes – you can refinance your car loan. It’s wise to check with a few lenders because each may weigh these factors a bit differently. Keep in mind that some lenders have a minimum loan balance they’ll refinance (for example, they might not refinance if you only owe a small amount), or they might want you to have had the original loan for a certain minimum period (such as 6 months). In general, though, there’s no hard rule against refinancing an auto loan as long as you can qualify for the new loan.

Can I Refinance My Car with the Same Lender?

Yes, it’s possible to refinance your car loan with the same lender that holds your current loan, but you are not obligated to do so. Many people choose to refinance with a different lender to get a better interest rate or terms. However, it’s a good idea to check with your current lender to see if they can offer a competitive refinance deal, especially if you’ve been a good customer.

Refinancing with the same lender can have some conveniences. The lender already has your information and payment history, so the process might be smoother with less paperwork. You would continue dealing with the institution you’re familiar with, which can be comfortable. If you have a solid on-time payment record and your credit score has improved, your lender might be willing to adjust your loan (sometimes called a loan rewrite) to a lower rate or change other terms to keep your business.

On the other hand, sticking with your current lender could limit your options. They might not offer significantly better terms unless you present a competing offer from elsewhere. By shopping around, you could find that another bank, credit union, or online lender has a much lower rate or more favorable term. Your original lender isn’t guaranteed to have the best deal for you – they already have your business, so there’s less incentive for them to drastically lower your rate without reason.

The best strategy is to get quotes from multiple lenders, including your current one. If an offer from a new lender is better, you can either switch to that lender or ask your original lender to match it. The goal of refinancing is to save money or get better terms, so choose the option that achieves that, whether it’s your same lender or a new one.

Can I Refinance My Car Loan and Get Cash Back?

Yes, some auto refinance loans allow you to get cash back, essentially doing a "cash-out" refinance. This means you refinance for an amount larger than your remaining loan balance and take the extra money in cash. For example, if you still owe $8,000 on your car but the vehicle is worth more, a lender might refinance your loan for $10,000 and give you the additional $2,000 in cash at closing. For some, this is a way to use their car’s equity to access cash for debt consolidation or other financial needs.

This can be useful if you need funds for other expenses or want to pay off high-interest debt. However, be cautious: that extra cash is not free money – it gets added onto your new loan, increasing your balance and possibly your monthly payment. Only pursue a cash-back refinance if it comes with a lower interest rate or better terms that make financial sense. In other words, make sure you're still saving money or lowering your monthly payment while getting that cash. The goal is to avoid ending up paying a lot more in interest just to get some cash in hand.

Why Car Loan Refinancing Can Be Beneficial

1. Lower interest rate: This is the most common reason to refinance. If you can qualify for a lower annual percentage rate (APR) than your original loan, you'll reduce the amount of interest you pay on your car debt. A lower interest rate means more of each payment goes toward the principal balance rather than interest, which saves you money over the life of the loan. Even a drop of a couple of percentage points can add up to hundreds or thousands of dollars saved. Additionally, with a lower rate, you could keep paying the same monthly amount as before and end up paying off the loan sooner.
   
   
2. Lower monthly payments by extending the term: Refinancing may allow you to extend your loan’s term length to spread out the remaining balance over more months. By doing so, you can significantly reduce your monthly payment and ease the strain on your budget. This is helpful if your current payments are too high for your comfort. Keep in mind, though, that a longer loan term means you'll likely pay more interest in total, since you’re paying for a greater number of months. (Conversely, you could choose a shorter term when refinancing if you can afford higher monthly payments – that way, you'd pay off the loan faster and pay less interest overall.)
   
   
3. Remove a co-signer or change borrowers: Refinancing is an opportunity to alter who is responsible for the loan. If you originally needed a co-signer to get approved, refinancing allows you to take out a new loan in your own name, thereby removing the co-signer from any obligation. On the other hand, if the car’s original loan was in someone else’s name (for example, a parent financed a car for you when you couldn’t qualify), you can refinance and put the loan in your name. This transfers the debt to the appropriate person and can help build that person's credit going forward.
   
   

Should I Refinance My Vehicle?

Not sure if refinancing is the right move for you? Ask yourself a few questions about your situation:

• Did you recently improve your credit score? If you took out your car loan when your credit was bad or just fair, you were likely given a higher interest rate. Since then, have you worked on your credit and boosted your score? If yes, refinancing might be right for you. A better credit score now could qualify you for a much lower interest rate on a new loan. That means you could save money and possibly get a lower monthly payment than what you're paying on your existing auto loan. (Tip: Check your current credit score if you haven’t recently – knowing where you stand will help you gauge potential refinance offers.)
  
  
• Do you have good or excellent credit now? Even if you already had a decent rate to begin with, it’s worth checking current offers if you now have prime or super-prime credit. Sometimes market interest rates change or lenders become more competitive. If you can snag an interest rate even 1–2% lower than your current rate, that can save you a significant amount in interest over the remaining life of the loan. Borrowers with strong credit have the most to gain from refinancing, as banks and lenders will offer them the best rates.
  
  
• Has your financial situation improved? Consider your income and debts today versus when you first got the car loan. If you’re earning more income now, or if you’ve paid down other debts (lowering your debt-to-income ratio), you might qualify for better financing terms. A lender could offer you a lower rate, or approve you for refinancing when maybe you couldn't qualify for the best terms before. An improved overall financial picture gives you more leverage to refinance on favorable terms.
  
  

If you answered "yes" to any of the above, it’s a good sign that refinancing your vehicle could be beneficial. On the flip side, if your credit score has dropped or you’re barely keeping up with your current payments due to other financial issues, refinancing might not help unless it significantly lowers your payment. Always weigh the potential savings (or the relief in monthly payments) against any costs of refinancing before making your decision.

How to Rebuild Your Credit Score

If you find your credit isn’t where you want it to be yet, don’t worry – rebuilding credit takes time, but you can accelerate the process by practicing good habits. Here are a few tips to boost your credit score:

1. Never miss a payment: Pay all your existing loans and bills on time, every time. Payment history is the single biggest factor in your credit score. Even a single missed payment can hurt your credit and remain on your record for years. It’s always best to pay bills in full, but if you can’t, at least make the minimum payment rather than skipping it. Setting up automatic payments or reminders can help ensure you never accidentally pay late.
   
   
2. Build credit with the right tools: If you don’t have much credit history, consider starting with products designed to help build credit. For example, you could get a secured credit card (which requires an upfront security deposit) or take out a small credit-builder loan or secured loan. These are easier to qualify for and will report your payments to the credit bureaus. By managing them responsibly (keeping balances low and paying on time), you’ll establish a positive track record that can raise your score over time.
   
   
3. Apply for new credit sparingly: Each time you apply for credit, a hard inquiry appears on your credit report, which can shave a few points off your score. Lenders also see a red flag if you suddenly open several new accounts or take on a lot of debt at once. So avoid seeking too much new credit in a short span. Instead, focus on using the credit you have wisely and paying it down. Keeping your overall debt low relative to your income and credit limits will improve your credit profile. In short, be patient and selective – over time your good payment history and lower debts will gradually boost your credit score.

To better understand the timeline and what really impacts your progress, learn how long it takes to improve your credit score and which factors influence it most.

Documentation Needed to Refinance Your Car

When you’re ready to apply for refinancing, be prepared to supply much of the same information you did when you first financed the car. Having these documents handy will make the process smoother:

• Proof of income: Recent pay stubs and/or your latest tax return. If you’re self-employed or your income varies, a lender might ask for a few months of bank statements to verify your income.
  
  
• Bank account information: Details for the account you’ll use to make payments (often a voided cheque or your bank’s routing and account numbers) so the new lender can set up automatic payments if desired.
  
  
• Personal identification: A government-issued photo ID (such as a driver’s license or passport) to confirm your identity.
  
  
• Vehicle details: Information about the car you’re refinancing, including the year, make, model, trim, and current mileage. You should also have the Vehicle Identification Number (VIN). Additionally, be ready with the vehicle’s title (the legal document proving ownership). The lender or DMV will handle transferring the title. Some lenders may also ask for proof of vehicle registration and proof of insurance to ensure the car is properly registered and insured.
  
  

Where to Refinance Your Car

When it comes to refinancing, you have multiple options on where to do it. Many traditional banks and credit unions offer auto loan refinancing. It’s worth starting with the bank or credit union you already use, as they might offer competitive rates or loyalty discounts for existing customers. However, don’t stop there – it’s important to compare a few offers.

In addition to banks, there are online lenders and specialized auto finance companies that focus on car loan refinancing. These online services often let you get quotes or pre-approvals easily, and they may provide very competitive rates since they specialize in auto loans.

If you’re ready to refinance your vehicle or want to explore options, you can also use a platform like Canada Drives. With a simple online application, Canada Drives can tell you if you qualify for a lower interest rate, a longer term (to get lower payments), or both. The process is fast and can be done entirely online. Whether your credit is bad or good, there may be refinancing offers available for you.

The bottom line is to shop around. Check with your current lender, local banks/credit unions, and reputable online lenders to find the best refinance loan for your needs.

FAQ

How soon can I refinance my car loan?
You can refinance a car loan as soon as a lender is willing to do it – some have no waiting period. However, many lenders prefer you to have made at least 6 monthly payments on the original loan first. Having a few months of payment history gives the new lender confidence and also lets your car’s value stabilize a bit before refinancing.

Is there a cost or fee to refinance a car loan?
In most cases, refinancing a car loan doesn’t require a large out-of-pocket payment. Many lenders do not charge application fees for auto refinancing, but some might have a small origination fee or a fee to transfer the title. Always check if your current loan has a prepayment penalty for paying it off early – if it does, factor that cost in when deciding whether refinancing makes sense.

Can I remove a co-signer by refinancing my car?
Yes. Refinancing is essentially getting a new loan, which means you can choose who is on that loan. If you qualify on your own, you can refinance solely in your name and remove the co-signer. Once the refinance is complete, the co-signer will no longer be responsible for the car loan.

Do I need a down payment to refinance my car?
No. Unlike an initial car purchase, refinancing doesn’t require any down payment. The new loan simply takes over the remaining balance of your existing loan and pays it off. You generally won’t need to pay anything upfront, aside from possibly a small administrative or title transfer fee (and even that can often be rolled into the loan).

Can I refinance my car with a personal loan?
It’s possible, but usually not the best idea. You could use an unsecured personal loan to pay off your car loan, but personal loans typically have higher interest rates than auto loans. Unless you can secure a personal loan with a much lower rate (which is uncommon), an auto refinance loan will likely save you more money in interest.

People Also Asked

When should I refinance my car loan?
You should consider refinancing your car loan when you can get better terms than your current loan. This typically means your credit score has improved or market interest rates have gone down since you financed the car. Refinancing earlier in the loan term (within the first couple of years) tends to yield more savings than waiting until the loan is almost paid off.

Is refinancing a car loan a good idea?
Refinancing is a good idea if it saves you money or makes your payments more manageable. If you can lower your interest rate or monthly payment (without extending the term too much), it’s likely a smart move. However, if refinancing would cost you more in interest over the long run or comes with high fees, then it might not be worth it.

Does refinancing a car hurt your credit?
Refinancing can cause a slight, temporary dip in your credit score. When you apply, the lender will perform a hard inquiry on your credit report, which may shave a few points off your score. Also, opening a new loan (and closing the old one) can shorten the average age of your credit accounts. These effects are usually minor and fade over time, especially if you make on-time payments on your new loan.

What do I need to refinance my car?
To refinance, you’ll need to provide personal and financial information to the lender, similar to when you first got the car loan. This includes a photo ID, proof of income (such as pay stubs or tax returns), proof of residence (a utility bill or similar document), and details about the car (the VIN, current mileage, make/model, plus the title and registration). Essentially, have the same kinds of documents ready that you needed for the original loan.

Can I refinance a car loan with bad credit?
It’s possible to refinance with bad credit, but it can be challenging. Lenders might approve a refinance for someone with poor credit, but often at a higher interest rate. If your credit score hasn’t improved since your original loan, you may not get a better rate through refinancing. In many cases, it’s better to work on improving your credit first (or apply with a co-signer) so you can qualify for a refinance on more favorable terms.

Related Prompts

• Explain how auto loan refinancing works in simple terms.
  
  
• List the benefits and drawbacks of refinancing a car loan.
  
  
• Provide a step-by-step guide to refinancing a vehicle.
  
  
• Describe a scenario where refinancing an auto loan might not be beneficial.
  
  
• Calculate how much money could be saved by refinancing a car loan from a higher interest rate to a lower one.